Question

What is risk rating? Why is it important? What’s the impact on the insurance market?

Answer 1

Risk rating is an economic measure of assessing a risk associated with an economic activity. Almost all uncertain economic activities are expected to bear some degree of risk and the investigation of factors that can raise the probability of this risk becomes esstential. Risk rating is given by

= Probability of Occurrence x Severity of Consequences Value

Insurance market are more prone to risk because of hidden information that the insured tend to have. There are moral hazards where people take unnecessary risks after taking an insurance which insurance company cannot predict. Also health insurance companies offetn charge high premium from people with poor health so that they tend to select those patients that have poor health. This adverse selection raises the risk of insuring a pool of only unhealthy individuals.